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CommercialThu, 17 Jun, 21

Finding Good Tenants Now Biggest Challenge in Current Market - Survey

Finding Good Tenants Now Biggest Challenge in Current Market - Survey

A tenant’s risk survey conducted by PayProp for the first quarter (Q1) of 2021 in South Africa revealed that, getting good tenants on the current post-pandemic market is the major concern for property owners and agents surveyed. The survey, rental industry report, categorised tenants’ risk into five major risk types based on which assessments were made to find out the tenant risk in the market.

“In PayProp’s second State of the Rental Industry report, out now, more than half of the participants said finding good tenants was their biggest challenge in the current market. Knowing what to look out for when vetting tenants can go a long way in helping agents provide a good service to landlords,” the report stated.

PayProp is one of the largest processors of residential rental transactions in South Africa and the Rental Index survey is a quarterly guide outlining trends in the South African rental market; compiled from transactional data taken.

It classified the risk level into Minimum-risk, Low-risk, Medium-risk and High-risk. It noted that the credit checks were done on prospective tenants and not necessarily on tenants who are already renting.

“Minimum-risk tenants represented almost 40% of the credit checks done through PayProp in Q1 2021 – slightly higher even than in Q1 2020. More than 60% of tenants fall into the minimum- and low-risk categories, while almost a quarter were labeled as high-risk”, the report said.

 

TENANT RISKS

Income

The report observed that, minimum-risk tenants tend to have higher incomes than those in other categories, and by quite a margin. “In Q1, minimum-risk tenants had an average net income of close to R42 000 – almost R8 000 higher than low-risk tenants, and more than R15 000 more than high-risk tenants,” it said.

Credit Provider Association (CPA) and National Loan Register (NLR) accounts

It also noted that, minimum-risk tenants tend to have more ‘good debt’ accounts and almost no ‘bad debt’ accounts, with high-risk tenants having fewer ‘good debt’ accounts and more ‘bad debt’ accounts.

 A higher number of bad debt accounts can be indicative of a prospective tenant having needed additional funds to make it through the month or not qualifying for credit from other providers. “CPA accounts include insurance, cellphone contracts, retail stores and vehicle finance. These are the types of accounts you can reasonably expect someone to have, and are seen as ‘good debt’. NLR accounts, on the other hand, are something you don’t want to see on a credit check. These include short-term loans from micro-lenders, usually with very high interest rates, and are seen as ‘bad debt’” it explained.

Major Delinquencies

“Unsurprisingly, high-risk tenants had more major delinquencies against them than other groups, at 41% compared to 25% of medium-risk tenants. Less than 1% of minimum-risk tenants had a major delinquency against their name,” says the report.  Some of the ‘major delinquency’ that poses makes tenant riskier can include various types of negative entries on an applicant’s credit record, such as judgements, notices, adverse accounts, high levels of indebtedness, inter alia.

Debt

“Riskier tenants tend to have a higher debt-to-income ratio than lower-risk ones, meaning they spend a higher percentage of their monthly income on debt repayments each month. High-risk tenants may have a higher debt-to-income ratio (on average 47% in Q1), but they spend smaller amounts on their debt repayments,” the averred

Credit Score

The report implored property owners, agents and managers that, since tenants are placed into risk categories based on their credit score, minimum-risk tenants have higher average credit scores than higher-risk ones. When vetting tenants, it is vital to not only consider the credit score or risk category, but other factors as well. We recommend taking a look at bank statements and salary slips where possible and contacting references before making a final decision.”

PayProp concluded that, “in coming months, it will be important for all rental agents to be able to distinguish a low-risk tenant from a high-risk one.”

 

Source: Mohammed Bomanso Issah (Real Estate Times Africa)

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